Hey Greg, what do you think of Bitcoin?
Over the last week I have had multiple people ask me about Bitcoin. The question usually goes like this, “Hey Greg, what do you think of Bitcoin? Should I buy some?” If you haven’t heard of Bitcoin or if you are confused by it let me take a minute and share some ideas on it and how it relates to your investment strategy.
Bitcoin is a form of electronic or digital currency. It is also referred to as “cryptocurrency.” There are over 100,000 merchants and vendors that accept Bitcoin as payment. Its advocates promote its viability to eliminate government manipulation from its value. Its adversaries say it is a short-term fad that will end badly.
I’m not going to speculate as to the future of Bitcoin or the place that crypto currencies could have in our economy. Anyone that has used PayPal or Venmo can attest to the convenience of being able to transfer money to another person without carrying cash. There is definitely a place for digital currency in the future.
What I would like to address and the reason for all the conversation right now, is regarding Bitcoin as an investment. Is it a good idea to add it to your portfolio to improve returns and add diversification?
The reason why Bitcoin is getting so much press right now is because of the incredible return it has had over the past 12 months. It has gone up more than 900%. Yes, that’s correct, 900%! That means if you had invested in Bitcoin at the beginning of the year with an amount of money that a luxury vehicle might cost, roughly $75,000, that amount of money would have grown to $1 million today.
If there is anything that I have learned over the last 11 years in working with investors it is that anytime there is a big gain, people start jumping on board because they believe it will continue to go up. We are wired to not want to miss out on something good. (FOMO is real- Fear of Missing Out)
The future of Bitcoin is going to be based entirely on if people continue to believe it is worth something. Investing in Bitcoin requires a collective belief, one not predicated on any tangible evidence, that someone in the future will be willing to pay more for the cryptocurrency than today.
This is the Greater Fool Theory. (There will be a greater fool than you in the future that will buy something for more than you paid for it today) The Bitcoin investment assumes this momentum will continue indefinitely. The problem with Bitcoin is that it doesn’t have any intrinsic value other than what someone attaches to it. It doesn’t create jobs, provide a service, or add value. It is the definition of a speculative investment.
Should you invest in Bitcoin? I’ve never been a proponent of investing in currency. It is way, way, way, too volatile. And that is what is happening with Bitcoin.
Volatility always has something called reversion to the mean that is attached to it.
Imagine you wake up in July and you see snow and for 3 days it continues to snow. Do you think logically that it will continue to snow like that forever in July and do you think that it will logically continue to snow every July? No, of course not. You’re going to view it as an aberration because eventually the temperature each day will get closer and closer to what it is normally like in July. You just had a little outlier that occurred and eventually the weather will return back to the mean.
We see that in stocks. With stocks there have been many years where returns have been 20, 30 or 40 percent but there have also been many years that haven’t been even close to that. But at the end of the day the return reverts back to the mean.
The problem with Bitcoin is that it is so relatively new, we are still measuring it out statistically and it is hard to say where that mean is. The concern that I have with it now is that something that moves up that quickly can go down just as fast.
So my strong advice to you is that if you are going to go into Bitcoin, please do it with a very, very small, small percentage of your overall net worth.
I’m a firm believer that the boring consistent manner towards achieving wealth is the way to go. There are people who win lotteries, but most people don’t. I know I could never persuade a lottery winner that he shouldn’t be in the lottery, but most people don’t win it. Most end up losing.
Building wealth is not a matter of finding the magic beans or the silver bullet investment; it is more a matter of disciplined behavior executed for a consistent period of time.
Until next time,